This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Kass: Still Short Bonds

This column originally appeared on Real Money Pro at 8:49 a.m. EDT on Oct. 1.

NEW YORK ( Real Money) --

"The exact contrary of what is generally believed is often the truth."

-- Jean de La Bruyère

I maintain the view that shorting the U.S. fixed-income market is still the trade of the decade.

And, despite the known headwinds of slowing domestic and non-U.S. economic growth and the threat of the fiscal cliff, I now believe that the potential exists for bonds to experience pricing pressure (and an increase in bond yields) over the near term.

This view runs counter to consensus expectations after the Fed has recently embarked on QE3 and to my skeptical view on its impact on the real U.S. economy but consider the following factors:

  • QE3 is designed to attack private-sector mortgage-backed securities yields -- it is not directly targeting public sector Treasury yields -- and to buoy the U.S. housing market.
  • Since 2009, the Fed has purchased $1 trillion of U.S. Treasury notes and bonds with a five-year maturity or greater.
  • Should Operation Twist not be extended at year-end, the Fed will no longer be the dominant, incremental buyer of U.S. Treasuries. What class of buyer will pick up the slack?
  • Though commercial banks might replace their mortgage-backed securities positions with renewed focus on Treasuries, they are unlikely to buy at as a swift a pace as the Fed buys Treasuries.
  • China, a large buyer of U.S. Treasuries, is facing a growth slowdown and will likely be less of a buyer of our debt in the year ahead.
  • As a result, the U.S. Treasury bond market might be less distorted (read: lower in yield, higher in price) than is generally anticipated.
  • Should long-term Treasury yields rise, the U.S. dollar will likely increase in value, the flow of money into safe-haven assets will likely be diminished, and the velocity of money and bank lending activity will likely accelerate.
  • Natural price discovery (read: higher yields, lower prices) in the Treasury bond market has likely been heightened by the Fed's latest policy move.

Rather than reduce interest rates of all species across-the-board, QE3 might result in a normalization of long-term U.S. Treasury bond yields to higher levels coupled with a steepening in the yield curve.

This is a variant view and is not anticipated by most market participants, who are today pricing the yield on the 10-year U.S. note at a lowly 1.65%.

I remain of the view (as evidenced by my portfolio's outsized exposure) that shorting the U.S. bond market is the trade of the decade. (For a further explanation here is a link to my Value Investing Congress presentation in May 2012.)

Finally, this morning, Barry Ritholtz's Big Picture blog highlights a true contrarian factor that might favor my short bond trade -- namely, that the Fidelity bond funds are now larger than their equity funds.
At the time of publication, Kass and/or his funds were long TBT common and calls/short TLT common, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free


Chart of I:DJI
DOW 17,660.71 +9.45 0.05%
S&P 500 2,050.63 -0.49 -0.02%
NASDAQ 4,717.0940 -8.5450 -0.18%

Our Tweets

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs